Growth stocks pass torch to cyclicals

Kevin Marder is a guest columnist and a co-founder of MarketWatch. He is
principal of Marder Investment Advisors Corp. and a contributor to
The Gilmo
Report. Previously, he served as chief market strategist for Ladenburg Thalmann
Co. and developed institutional fixed-income risk management software for
Capital Management Sciences.

On average, there are two auspicious times each year in which to buy stock. In some years there are three, and in others, zero. The current market is considered such a time.

The first inkling of this was mentioned in the Dec. 13 report. ("While institutions are still playing their cards close to their vest, subtle hints emerge in this week's action that suggest shares are closer to a substantial intermediate-term advance than a decline.")

Following an intermediate-term decline in the averages, the single best indicator of upward revaluation is believed to be the formation of, and breakout from, bases.

Indeed, this is what began to transpire at the time of the Dec. 13 report. The fact that there were not a lot of growth shares setting up in bases was something that has not been seen in a while. Instead, it was cyclical/value stocks that were becoming the target of institutional participants. Otherwise, it was business as usual.

Since the Dec. 13 report, this pattern has become more obvious. As noted here, institutions have rotated out of defensive and growth issues and into cyclicals as a means of discounting an economic expansion in '13, not just an economic recovery. This growth-to-cyclical rotation occurs in the latter half of most bull markets, as an interest-rate-driven bull transitions to an earnings-driven bull.

Investors no longer need to pay premium multiples for recession-resistant growth stocks when they can get the same earnings growth from cyclical/value plays at cheaper valuations.

While there are still a number of growth titles vying for leadership honors (i.e., they are setting up and breaking out of bases), the volume on the breakouts and up days is not as impressive as that seen in cyclicals like wood-products king Weyerhaeuser (WY) or mortgage services specialist Ocwen Financial.

At this point, it is worth remembering that, in the wake of a market decline, the first names out of the chute are normally your leaders on the next advance. The stocks that bounce back like tennis balls — and in this case that would include 3-D printer makers Three D Systems (DDD) and Stratasys (SSYS) in addition to Qihoo 360 Technology (QIHU) — usually offer the best candidates for intermediate-term speculation.

Among the names, Facebook
FB, +0.50%was noted here on Dec. 26 ("While it is possible for an aggressive speculator to use the Dec. 3 high of 28.88 as a potential entry pivot, the view here is that the overhead supply of stock should be respected. Translation: Let price move further up in its seven-month base so that there are fewer underwater holders who might be tempted to sell so they can 'get out even.').

The comment stands. Allowing price to move up further should improve the chances of a successful entry. In the meantime, price broke out of a five-week base on the type of mediocre volume that has characterized up days and breakouts in most growth names.

Ocwen Financial
OCN, +2.01%
provides mortgage-loan servicing and asset-management services. Its stock is up 1,583% since April '08. Most analysts see '12/'13 earnings growth coming in at 87% and 210%.

Technically, the stock began showing signs of life a few sessions ago, when volume began to expand. Monday OCN emerged from a tight, five-week range on volume 121% above normal. The all-time high set Oct. 24 at 39.83 represents a suitable entry pivot.

Wood products specialist WeyerhaeuserWY, -0.09%
is expected to post earnings growth of 65% and 86% in '12/'13. On Jan. 2, the stock broke out of an 11-week base on volume 55% above normal. Wednesday saw a follow-through move on volume 52% more than average. Clearly, there is some serious large-investor interest here. Price is 5.1% above the top of the base. The stock could be entered around Wednesday's closing level at 30.36, using a 7% or 8% stop.

Otherwise, at this stage, the leaders, both cyclical and growth, are breaking out of bases and are either materially extended or stand at the outer reaches of their buy zones. The speculator targeting intermediate-term gains in leadership issues should recognize that in trading, there is always a tradeoff.

Waiting for more evidence that a move is for real may increase one's conviction level when one enters a position. But there is a price to be paid. And that price is either less reward potential, or should the stock continue upward without pausing for any sort of secondary entry point, perhaps no entry at all.

In summation, the bull market transitions from a growth-stock-led, interest-rate-driven phase to a cyclical, earnings-driven phase. As a result, cyclical stocks in certain segments such as wood products, mortgage services, and chemicals are passed over. The medium-term speculator has an eclectic menu from which to place orders.

At the time of this writing, of the stocks mentioned in this report, Kevin Marder or an affiliate thereof held no positions, though positions are subject to change at any time and without notice. The information contained herein may have been previously disseminated.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.